Concurrent Credit Portfolio Losses

TL;DR

This paper investigates the dependence structure of concurrent losses in credit portfolios, revealing asymmetries and correlations across different portfolio sizes, which have significant implications for financial stability.

Contribution

It provides the first empirical analysis of pairwise copulas for concurrent credit portfolio losses, highlighting non-Gaussian dependence and the significance of portfolio size effects.

Findings

Concurrent large losses are more likely than small ones.

Portfolio loss correlations are significant across all portfolio sizes.

Idiosyncratic effects are negligible.

Abstract

We consider the problem of concurrent portfolio losses in two non-overlapping credit portfolios. In order to explore the full statistical dependence structure of such portfolio losses, we estimate their empirical pairwise copulas. Instead of a Gaussian dependence, we typically find a strong asymmetry in the copulas. Concurrent large portfolio losses are much more likely than small ones. Studying the dependences of these losses as a function of portfolio size, we moreover reveal that not only large portfolios of thousands of contracts, but also medium-sized and small ones with only a few dozens of contracts exhibit notable portfolio loss correlations. Anticipated idiosyncratic effects turn out to be negligible. These are troublesome insights not only for investors in structured fixed-income products, but particularly for the stability of the financial sector.